February 19, 2004   Copyright © 2004, Greenwich Financial Management Inc., a registered investment advisor.  Securities offered exclusively through Purshe Kaplan Sterling Investments of Albany, NY, a NASD member firm.

Demystifying Insurance, Part 11:

Long-Term Care Insurance

Given the limitations of the Medicare/Medicaid system, as discussed last week, long-term care is one of the most under-insured of risks. 

If you do need coverage, how much is enough?  A sufficient amount in the Northeastern metro region is probably about $325 to $350 per day.  A smaller amount, say half, could cover the risk of needing limited care at home care or residency in an assisted living facility, as opposing to a nursing home.

It makes sense to take out long-term care insurance in your fifties, rather than waiting longer.  Premium costs increase about 30% between fifty and sixty, and they can double between sixty and seventy.  Also, if you wait until you have a serious health problem, such as a heart attack, stroke, metastatic cancer, advanced diabetes, or the beginning of Alzheimer's disease, you won't be insurable. 

Many people seek long-term care to protect independence and retirement income.   Desire to conserve assets to pass on to children can also be a factor.  The financial advisor must explore the family dynamic.  Is there a living spouse able to provide most care?  Are children nearby and likely to be helpful?  Long-term care is a particular issue for women.  Three out of four elderly residents of nursing homes are women, and women who reach the age of 65 have a better than 50% chance of needing extended care before they die. (Source: Insurance Marketplace Standards Association, "Long-Term Care Insurance" (2003)). 

Leading providers of long-term care insurance include John Hancock, General Electric Capital Insurance, Prudential, MetLife and Unum.  Unum is particularly known in the group insurance market, but its claims paying reliability has been questioned.

An important contract feature is what triggers benefits.  A prevalent test is inability without substantial assistance to perform at least two Activities of Daily Living (ADL), including ambulating, eating, bathing, dressing, continence, toileting and transferring (getting in and out of bed).  One of the earliest signs of disability from aging is often impairment of cognitive abilities.  The most favorable policies will include consideration of such cognitive changes.  Avoid any medical models based on required prior hospitalization.  A second feature is who determines impairment.  It is desirable that this be determined by your own physician or by a third party independent physician.  However, in most policies, the insurer reserves the right to demand an examination by its appointed doctor.  A third feature is whether payment is by reimbursement (submission of qualifying expenses) or by indemnity (a flat payment per day if you qualify).  Indemnity is better but also typically about 20% more costly.  Indemnity may make sense if the recipient will lack help in submitting claims.  Fourth, make sure the policy covers care at home, not just in a nursing facility.  Some policies will also reimburse for certain equipment necessary to set up home care.  Good policies also cover a blend of forms of care, such as adult day care and at home custodial assistance.  A fifth feature with monetary value is "waiver of premium," meaning you don't have to make premium payments while you are receiving benefits.

Most long-term care policies include exceptions for drug addiction and alcoholism.  Insurance companies won't protect you against such risks.  I looked at one contract that excluded participation in a "felony, riot or insurrection," so take it easy.

There are several ways to lower the premiums you will pay:

• You can lengthen the period of "elimination," an initial uncovered interval.  Some policies pay from day one, but all cost less with longer elimination periods; the option usually ranges between one to six months.  Protect yourself against financial catastrophe, not inconvenience.  But make sure you will have enough liquid assets in store to pay for such an uncovered period (figure up to $10,000 per uncovered month).
• You can decline inflation protection, though I don't recommend it.  Inflation protection may be based on the CPI index, on a set rate such as 5% increase (simple or, preferably, compound), or on a doubling period.  Unfortunately, none of these scales may keep up with the high rate of inflation in nursing home costs. 
• You can shorten the benefit period; instead of life coverage, you may choose a limit of, say, three years.  Nationally, the average stay in a nursing home is 2.8 years. 

You can consider insuring for a lower daily benefit, as some protection is better than none.

The federal Insurance Portability and Accountability Act (1996) specified that within certain limits, premiums paid for "qualified" long-term care insurance plans can be itemized as "unreimbursed medical expenses."  An employer generally will be able to deduct the cost of providing long-term care insurance to employees, even if the benefit is limited to executives.  Like health insurance, benefits paid by "tax-qualified" long-term care insurance are not taxable as income-an important advantage.  Indemnity plans currently may be tax-qualified up to a maximum of $230 per day, inflation indexed.  

Although there is a great need for group long-term care, most group plans are deficient.  In particular, most do not offer an inflation clause.  Where the insurance is not underwritten (health exam, tests, questionnaire), it tends to be a bad economic deal for healthy workers--but it can be a good deal and the only one available for those unwell people at high risk of needing long-term care.

Long-term care is regulated by the states.  The agent who can offer life insurance is usually also licensed in health and disability, though it is most helpful to find someone with specialized expertise in long-term care.  It pays to shop around; don't just take the insurer that comes knocking at your door or hooks up with your professional association.

Andy Szabo, CFA, is Managing Director of Greenwich Financial Management Inc., a Registered Investment Advisor, which advises individuals and companies on investments, insurance and employee benefits.  Questions or comments welcome by phone (203-531-2877) or e-mail: Szabo@GreenwichFinancial.com.